Opinion

Hugo Dixon

Enough austerity, it’s time for reform

By Hugo Dixon
January 9, 2012

Semantics could help save the euro zone. There is a crying need to distinguish between fiscal austerity and structural reform.  The endless austerity programs adopted by the GIIPS — Greece, Ireland, Italy, Portugal and Spain — threaten to crush their economies so much that they are socially unbearable. By contrast, reforming pensions, labor markets and the like would be good for long-term growth. A policy mix that emphasizes the latter and draws some sort of line under the former is needed to stop the euro crisis spinning out of control.

Europeans have become grimly familiar with austerity spirals over the past two years. A government that needs to cut its fiscal deficit embarks on a program of tax hikes and spending cuts. The snag is that this fiscal squeeze, in turn, squeezes the economy — partly via the direct impact of cash being sucked out of the private sector and partly because the private sector loses confidence. The depressed economy means the government’s tax take doesn’t rise nearly as much as envisaged. So the deficit doesn’t decline much and, as a percentage of shrunken GDP, it falls even less. The governments’ creditors, led by Germany, then demand another round of austerity to get the program back on track. With each round, the howls of pain from the population increase, belief that there is light at the end of the tunnel declines and the government’s political capital shrinks.

The Greeks, Irish and Portuguese have been trying to run up this down escalator the longest. Italy and Spain are now embarking on the same regime. Yet more doses will be required over the coming year if the policy mix is unchanged. After all, last year’s budget deficits are expected to be about 10 percent for Greece and Ireland, 7-8 percent for Spain and Portugal (if a one-off pension transfer is ignored) and 4 percent for Italy.

Some austerity was needed given that expenditure had run out of control in the boom times and that, in some cases, there was a deliberate fiscal boost in the aftermath of Lehman Brothers’ bankruptcy in 2008. In Greece’s case, there was also a failure to implement the programs properly, meaning time and credibility were lost. But endless rounds of austerity are debilitating. The better approach would be to have one chunky program that is properly implemented and then rebuild.

Of course, the creditors aren’t willing to give something for nothing. But this is where a semantic distinction between austerity and structural reform could be helpful. Both require political courage by a government and sacrifices by its people. But the former pushes an economy down, while the latter boosts it — albeit in the long term. A virtuous cycle is even possible with the economy reviving, tax income rising, the deficit falling and confidence returning.

Pushing up retirement ages is a case in point. This doesn’t just reduce government spending, especially in the long run as savings build up year after year;  it also increases the productive potential of an economy by expanding its work force. Or take labor reform. Making it easier to hire and fire people puts downward pressure on wages, improving an economy’s competitiveness and reducing unemployment — which, in turn, cuts government spending on social security.

Other desperately needed reforms — privatization, liberalization of product markets, and increasing the efficiency of the public sector and the judiciary — would also improve long-term growth. Privatization would have the added benefit of cutting government debts, as would crackdowns on tax evasion.

The GIIPS have all done something in the field of structural reform. Italy, Spain and Greece, for example, are pushing up retirement ages. But the reforms have been slow in coming and sometimes half-hearted. Greece is the worst example: little has happened on tax evasion or privatization. Meanwhile, the new governments in Rome and Madrid have yet to get to grips with labor reform, although they are indicating that they will do so soon.

If the GIIPS could convince their creditors that they were serious about such reforms, they would win brownie points. That would put them in a better position to avoid yet more rounds of austerity. After all, Germany’s Angela Merkel would still be able to argue to her people that the peripheral economies were serious about change. What’s more, the economies of Germany and other creditor nations would benefit. Austerity in their neighborhood combined with the threat that the whole euro zone could blow up is not good for business. But to start the process, policymakers and pundits need to stop talking about austerity and reform as if they are the same.

PHOTO: A one euro coin is held in an adjustable spanner in this picture illustration taken in Ljubljana, January 4, 2012. REUTERS/Srdjan Zivulovic

Comments
4 comments so far | RSS Comments RSS

aka. rape and plunder – “privatization, liberalization of product markets, and increasing the efficiency of the public sector and the judiciary”

this reeks of republicanesque anglosaxon capitalism

americans and brits also howl, most desperately, from the economic pain inflicted by a legacy of cumulative reforms in their backyards

Only mad cows with BSE (basically silly economics) promote this deforming nonsense

Posted by scythe | Report as abusive
 

The obvious problem is a lack of effective leadership. The countries of the Euro seem to lack “great communicators” capable of explaining the problems present that must be resolved if there are to be “good times” in the future for this and /or future generations.

People will accept almost anything so long as they understand that there is little or no choice and that there is light at the end of the tunnel someday. But you have to inform and explain so as to make them perceive themselves and THEIR choices as “part of the solution” and not “part of the problem”.

There is also the “sticky wicket” that there are increasingly insufficient jobs of ANY sort for the fastest growing demographic of populations world wide, the poorly educated, poorly motivated, poorly qualified, poorly experienced youth with no present or future place or purpose in existing society. They will have ever-increasing incentive to tear it down.

Posted by OneOfTheSheep | Report as abusive
 

The welfare of the people of these countries is the point, not the welfare of their Governments and Companies. It is a dangerous error to see the people as property to be “managed” efficiently by organizations which are essentially for sale to the highest bidder. This is the fatal trap into which the USA has fallen and cannot get out of.

America provides many lessons concerning bad Government and worse Companies. Citizens are different from Employees, which the USA just cannot seem to understand. Europe needs to beware.

Posted by txgadfly | Report as abusive
 

@txgadfly,

Your myopia is showing. Just WHO do you think the “welfare of the people” comes from? In today’s world, it’s a healthy economy.

The “welfare of the people” is pretty much similar to asking someone at what age will they retire and how well. The answer must, in the end, be consistent with current financial reality if it is to mean anything to anyone.

So from where does a healthy economy come? From government policies that are sustainable by the gross national product (GNP) of a given country (or confederation of them). The more unrealistic (greedy) the demands of a given labor force, the more likely their local economy is to sour and ultimately fail.

A country’s labor is an asset just as a country’s capital is an asset. The interplay between the two is a delicate balance between government and the governed such that commerce is profitable. If and when the expectations of the people wander far from economic reality government has two choices. Bring (manage) public opinion back to reality or preside over an ever-increasing economic failure. None who have lived through such would ever do it again if there is ANY other choice.

When profit is great, GNP grows and everyone benefits. As profits become elusive, private capital is increasingly likely to leave for greener pastures. Every year is a new negotiation, and in a very real way citizens ARE the “engine” that makes successful countries producers and unsuccessful countries economic failures. Eventually Socialism runs out of other people’s money.

Posted by OneOfTheSheep | Report as abusive
 

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